move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they … reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational …

: a secondary asset market and a bank deposit contract. For full confidence we obtain the well-known result that consumers … prefer the bank deposit contract over the asset market, since the former can provide the optimal cross subsidy for consumers … it avoids inefficient liquidation if the bank reserve holdings turn out to be suboptimal. …